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Guess? Second-Guesses SSB

By Dave Marino-Nachison (TMF Braden)
June 23, 2000

Summary: When a company and its analysts fight in public, is it polite to watch? Foolish investors can't tell the future, but they can try to insulate themselves from unwelcome surprises.

Apparel and accessories designer and marketer Guess? Inc.'s (NYSE: GES) shares took a tumble earlier in the week when, according to reports, an analyst's e-mail questioning the company's inventory management practices went public. Now the company is striking back with a press release of its own.

First a little dictionary work: Barron's Finance & Investment Handbook defines "backlog" simply as the "value of unfilled orders placed with a manufacturing company. Whether the firm's backlog is rising or falling," the book says, "is a clue to its future sales and earnings." The question raised by a Salomon Smith Barney broker's e-mail earlier this week, and reported in several news stories, is whether the company's wholesale backlog numbers include orders to company-owned stores as well as retailers.

That would be pretty fishy business since it might suggest the Guess? was juicing its backlog by shipping merchandise to itself. To remove those numbers from your model for Guess?, EPS-a-holics worried, might foul up the company's numbers vis-a-vis the all-important consensus estimate. More importantly, though, it might necessitate a broad rethinking of the company's ethics -- not to mention its business model. Retail sales made up about 42% of the company's revenues last year.

Apparently a Salomon analyst who doesn't follow Guess? -- nobody there does, as far as I can tell -- told the broker privately of her thoughts in suggesting he short the stock. The information got to CNBC somehow and the rest is mystery. A scan of competitor research reports don't reflect any similar skepticism, and nobody changed their rating on Guess? this week.

The company's 10-K doesn't answer the question. A company spokesman rubbished Salomon's claims in conversations with reporters, though, and co-Chairman and co-CEO Maurice Marciano said this morning: Salomon's statement "is completely false because we do not include sales to our own stores in wholesale backlog.... We are... comfortable with security analysts' current earnings estimates for the second quarter and the balance of 2000."

He kept going. "In addition," he fumed, "the e-mail stated that Salomon Smith Barney declined investment banking business for Guess? This is an absolute lie. We never considered them for the company's proposed secondary stock offering even though a Salomon Smith Barney investment banker made repeated phone calls to us attempting to obtain this business."

That might make one wonder if someone at Salomon was trying to put Guess? in its place, but such a theory -- while not implausible -- is difficult to prove. What's really important to keep in mind here is that Foolish investors should insulate themselves from having to scream "What the heck?" on a daily basis by understanding the businesses they own as well as possible. In the case of retail and manufacturing companies, understanding inventory management and reporting practices are a must.

That will help you through unexpected price swings and on to long-term gains. Bolts from the blue may always strike -- and it may turn out Salomon was right and Guess? was lying after all -- but nobody has yet been able to predict when and where lightning may fall. The trick, in the long term, is to be steady enough when you're not knocked out of the boat just because it rocks a bit.

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